Mexico: Rapid depreciation of Mexican peso at outset of 2015 prompts authorities to introduce foreign currency sales mechanism
March 12, 2015
The Mexican peso experienced a rapid depreciation in first months of 2015 due to the slide in global oil prices and rising speculation regarding the interest rate hike in the United States. At the end of February, the Mexican peso traded at 14.95 MXN per USD, which was virtually unchanged compared to the 14.99 MXN per USD registered at the end of January. Nonetheless, the Mexican currency lost 12.7% of its value against the greenback in annual terms in February and, in recent days, it continued to fall uninterruptedly. On 10 March, the peso experienced its biggest one-day drop and closed the day at 15.63 MXN per USD, a multi-year low.
In reaction to the peso’s dismal performance, the Exchange Rate Commission—made up of three members of the Central Bank and three members of the Ministry of Finance—announced measures aimed at providing support to the Mexican currency on 11 March. The Commission stated that it will conduct daily auctions between 11 March and 8 June in which it will sell USD 52 million without a minimum price requirement. The daily auctions came on top of the currency intervention program that the Commission announced on 8 December through which it is aiming to sell USD 200 million of foreign exchange on trading days on which the peso has weakened by 1.5% over the previous day. A similar program was put in place to support the currency between December 2011 and April 2013.
The Mexican Central Bank has decided to maintain a cautious approach to Mexico’s economic growth, given the subdued performance of the economy, falling inflation and a weakening exchange rate, according to the 29 January monetary policy meeting minutes. Moreover, the normalization of U.S. monetary policy took center stage in the discussions between the members of the board given its relevance to Mexico’s monetary policy as well as to exchange rate developments going forward.
In regard to the effectiveness of the exchange rate measures, Clyde Wardle, EM FX Strategist, and Marjorie Hernandez, FX Strategist at HSBC, stated:
Whether these efforts prove to be effective or not remains to be seen. By itself, USD52m per day is a small amount, but over a three month period it will add up. This is similar to efforts seen in the past by other LatAm central banks, notably Chile and Colombia, where steady intervention in amounts up to USD50m per day have proved effective in the past (Chile in 2008 and 2011 and Colombia through 2013 and 2014). In Mexico's case, the somewhat unusual amount of USD52m per day relates to the overall reserve accumulation program, as this was the amount the central bank planned to accumulate in reserves over the whole of this year (USD12.48bn). USD12.48bn divided by 240 business days = USD52m. In other words, the FEC is temporarily halting the reserve accumulation process and will reassess this policy in June.
Although Mexico is less exposed than Brazil, Colombia and Venezuela to the oil price slump and its economy is expected to benefit from the economic recovery in the U.S., the Mexican peso has come under strong pressure as sentiment toward emerging market currencies has soured. Nonetheless, the Exchange Rate Commission has enough room to intervene more aggressively going forward if necessary as Mexico’s international reserves totaled USD 193 billion in 2014 and the country also has a stand-by credit line with the International Monetary Fund (the so-called Flexible Credit Line), which is worth USD 70 billion. .
Author: Ricardo Aceves, Senior Economist